Ex-CBSL Governor defends ISB borrowings, says it averted early default

Former Governor of the Central Bank of Sri Lanka (CBSL), Dr. Indrajith Coomaraswamy, addressed allegations regarding the surge in International Sovereign Bond (ISB) borrowings during his tenure that led to the country’s debt default, clarifying that much of the debt was used for liability management and to avert an earlier default.

Speaking at a public lecture on “A New Paradigm in Macroeconomic Management,” Dr. Coomaraswamy responded to claims that his administration’s borrowing policies contributed to Sri Lanka’s eventual default. He acknowledged that ISB borrowings increased from USD 5 billion in early 2015 to USD 15 billion by the end of 2019 but argued that nearly half of this was due to switching financial instruments for better cost management and stability.

Commenting further, he clarified: “Thank you very much for asking me that question, giving me a chance to explain. One is I think the ISBs went up from 5 billion in the beginning of 2015 to 15 billion by end of 2019. So there’s a 10 billion increase in the ISBs outstanding.”

“Of the USD 10 billion increase in ISBs, USD 5 billion was due to switching instruments. In 2015, USD 3.5 billion of portfolio investment was in rupee securities, which are highly volatile. We reduced that to USD 600 million by 2019, and we also cut down SWAPs from USD 2.5 billion to USD 500 million. By shifting from these short-term and expensive options to ISBs, which had lower interest rates and longer maturities, we improved both cost efficiency and financial stability.”

He also defended the controversial USD 4.5 billion raised in 2019, noting that the issuance was intended as a buffer in anticipation of potential policy shifts under a new government.

“The second thing to say is that 4 billion that was raised in 2019, the practice was to have one issuance – usually at the beginning of the year, somewhere in February-March and we were used to raise about 2 and a half billion. That was actually successfully completed in March. Then we had the Easter bombing and it was clear as night follows day that the government was going to change. It was also clear that the incoming government and the people who are going to be doing economic policy in that government were likely to change policy significantly.”

“I shouldn’t talk for others, but my own thinking at the time was that the IMF programme will be discontinued. We may have difficulty in retaining our access to capital markets. We were told by our advisors that the markets were willing to give us some more money which was very surprising to me because we had had the constitutional crisis in the fourth quarter of 2018, we had the Easter bombing and people were still saying you know, we can give you money.”

“Mainly because at that time, we had passed the Active Liability Management Act, we had published the medium term debt management strategy and the national exports strategy was published. All those things had been put out as to explain how we are going to manage this situation. Our line was - yes we have a very fragile debt dynamics, but we know how to handle it and this is what we are doing to handle it. Because of that, the markets were willing to give us more money.”

“So, we took the money to build up our reserves that even if there is a reversal in policy as there was, we would have a bit of a buffer and give the government a bit more time to go back to the IMF. We thought they would leave the IMF, but then we thought that would be the wrong policy and that it would leave into a lot of reserves eventually, but we gave a bit more time for the government to switch course by building up our reserves, by taking a second ISB.  So, that’s how the 4.5 billion came in 2019 to give really a buffer for the government which was likely to come in, to basically as to how they wanted to proceed”, he added.

Dr. Coomaraswamy emphasized that much of the borrowing under his tenure was used to service existing debt rather than fund new spending.

“There’s also some Vérité research that was published that the total debt undertaken between 2015 and 2019, 89% of that was accounted for by repaying previous debt and in fact, in the World Bank’s development update I think… a couple of years ago there was a development update had a box in which they said that in 2017, 90% of the total borrowings went to repay previous debt. The government was basically borrowing to repay debt”, Dr. Coomaraswamy noted.

“If we hadn’t continue to borrow, issue ISBs and borrow, the maturity will have been increased, the cost would have been gone down. If we didn’t continue to do that, we would have I think defaulted much earlier.”

He concluded by stressing that CBSL’s debt strategy at the time aimed to gradually reduce external borrowings while extending maturities to avoid sudden rollover crises.
 
“We were trying to contain the situation. The medium term debt management strategy says basically that we must gradually reduce our external borrowings, because if you suddenly reduce it, you have a rollover problem. That’s what we had in here. We were trying to gradually reduce it and increase time to maturity, get rid of SWAPs and the short term stuff. I think we were on course, then markets recognized it. That’s why they gave us a second ISB and that was really to build up a buffer in terms of reserves in case the government wanted to change course”, he added.